Home office deduction could be less of a headache this year

If you work at a home-based business, you may want to consider a new, simpler option for taking a deduction for your home office on your federal income tax return this year.

Last year, the Internal Revenue Service announced a streamlined option for the home office deduction, effective for the 2014 filing season. The agency said the new “common sense” alternative was aimed at reducing paperwork and record-keeping hassles for those who claim the home office deduction.

About 3.3 million taxpayers claimed nearly $10 billion with the deduction in the tax year 2011, the IRS said.

The new “simplified” option involves multiplying the square footage of your home office, up to 300 square feet, by the fixed amount of $5 to determine your deduction, which is capped at $1,500.

To claim the optional deduction, you can complete a short worksheet found in the tax instructions and enter the result on your tax return. (If you're self-employed, you claim it on Schedule C, Line 30; if you're employed for someone else but use a home office, you claim it on Schedule A, Line 21.)

Previously, the only way to claim the deduction was to fill out Form 8829, a 43-line document. That option — which the IRS calls the “regular,” or standard method — can involve complex calculations of allocated expenses and depreciation, and carry-overs of unused deductions. That approach, the agency said, can be “burdensome” for small-business owners because they have to keep all sorts of records, such as mortgage and utility statements, to calculate their deduction.

If you use the new option, you can't depreciate the portion of your home used for business. But you can claim allowable mortgage interest, real estate taxes and insurance losses on your home as itemized deductions on Schedule A. These deductions don't have to be allocated between personal and business use, as the regular method requires.

As with taxes in general, however, things can be tricky even if they appear simple at first. The new method may be a particularly good option if you're less than diligent about keeping expense records for use of your home office, said Jessi Dolmage, a spokeswoman for TaxACT, a provider of online tax preparation software. If you do keep detailed expense records, though, you might be better off using the standard method.

To get a quick idea of whether the simplified option makes sense, you can multiply your home office's square footage by $5 and compare the result with your deduction on last year's tax return. If the result is more or about the same, you can go with the simpler form. But if it's less, you may want to take the time to calculate your actual expenses.

For more details about using the simplified option, see IRS Publication 587, Business Use of Your Home, available online. Or visit the IRS website to see some frequently asked questions.